Tyler Uebele

Paying with a credit card is generally considered to be convenient, safe, and secure.  With the ubiquity of merchants accepting credit cards for payment, and the increase in "fraud protection" services from credit card companies, it may seem like there is no reason to carry and pay with cash.  Indeed many of my peers think this way, and do not carry cash.  It seems we are quickly approaching an era of paperless currency, where all business is conducted electronically.  No more cold-hard-cash.  No more paper.  No more mints.  Cool huh?

Not if you run a small business.

It is no secret that the merchants who accept credit cards for payment have to pay transaction fees.  After all, the employees at the credit card company have to get paid.  It's just not something we often think about.

How Much Do Merchants Pay?

The cost to merchants varies wildly in a complex swamp of fees, but generally boils down to a monthly fee, a per transaction flat fee, and a per transaction percentage fee. From what I've read and merchants I've talked to, it can be as low as 2% or upwards of 20% of each transaction.  The usuric 20% is less common, strongly correlates to small transactions, and comprises mostly of a flat transaction fee.  If you've ever wondered why some merchants require a minimum purchase for credit card transactions, this is why.  

I asked the proprietor of a small bakery how she copes with the transaction fees.  She said "I just have to eat it".  I immediately understood that the choice for her was either surrender her profit from my four dollar purchase, or raise her prices to account for it.  I paid cash.  The math is simple: the more money she pays to her merchant account, the more she has to raise her prices to cover the cost.  These price increases apply to all customers, even those paying with cash.

Do you get cash-back, bonus miles, or other kick-backs for using your card?  Guess who pays for that.  The merchant does; then you do.

In most cases, though, the fees average a much smaller percentage of each transaction.  I interviewed the owner of a local art gallery who told me his losses are between 2-3% per transaction.  His typical transaction are much higher than the bakery's, averaging about $100 per.  It is easy to see how the flat transaction fee would constitute a much smaller percentage of a $100 purchase than a $4 purchase.

That doesn't sound so bad!

While 2-3% of each transaction is a much smaller, more manageable expense, it is a burden.  Remember also, this is 3% of a merchant's gross, not of their net profit.  This means that it hurts industries with a smaller profit margin (like grocery) greater than those with a higher profit margin (like accessories).  Imagine if your business only has a 5% net-to-gross, or 5% of gross is profit, and the credit card company takes 2-3% of your gross.  You just lost half your profit.

Here's another way to look at 3%:  Imagine you run a cash-only business open seven days a week.  If your store gets robbed once every five weeks, losing all the transaction-fee-free cash you brought in that day, you'd still be better off at the end of the year.  You would only lose 2.73% of your gross income.  Of course, you'd rather not get robbed so overtly, so you sign up for a merchant account, accept credit cards, and take the covert choice.

Paying with Cash

Credit card transaction fees represent a hidden tax, but we can evade that tax simply by paying with cash.  If merchants have to raise their prices to account for their volume of credit card customers, then it follows that more people paying with cash means lower prices, and/or more net profit for the business.  Both of these things are good for our local economies.  

Support small business.  Support your local economy.  Support America.  Pay with cash.